Wednesday, June 6, 2007

Impact of Foreign Direct Investment on Developing Countries.

Evaluate Impact of Foreign Direct Investment on Developing Countries.

Foreign Direct investment will help to increase AD, and therefore, can increase the rate of economic growth. However, FDI is often a relatively small component of AD. Multinationals don't like to risk too much in developing countries.

Foreign Direct investment can also help to increase productive capacity. This will shift AS to the right and enable higher rates of growth. Investment from abroad may also help improve the skills and technology of the local workforce; Foreign multinationals may help implement better work practices.

However, FDI may require skilled labour which has to be brought in from abroad. Therefore, developing countries don't benefit that much.

FDI may have strings attached; e.g. reciprocol spending.

FDI may involve exploitation of natural environment. Foreign multinationals may not care about environment.

Harod Domar model suggest savings and investment are important for determining the rate of economic growth.